Pharma Industry Outlook in 2018

By Patricia Van Arnum - DCAT Editorial Director

January 10, 2018

What will be the key trends shaping the pharmaceutical industry in 2018? DCAT Value Chain Insights takes an inside look.

From increased mergers and acquisitions (M&A), driven in part by US tax reform, to continued strength in venture capital funding, 2018 is expected to see increased M&A activity and continued strength from both private and public financing. What else may be in store?

Top 10 issues for 2018

1. Mergers and acquisitions in 2018. Led by a bullish stock market and US corporate tax form, some analysts are projecting a robust year in 2018 for mergers and acquisitions (M&A). According to EP Vantage, the editorial arm of Evaluate Ltd., 2018 could be a strong year for M&A in the pharmaceutical industry driven by both Big Pharma’s and Big Biotech’s need to restock and strengthen pipelines.

In terms of M&A, corporate taxation was a major impetus behind several recent high-profile deals that were in part sought for financial reasons to achieve an improved tax position through corporate inversion. A corporate inversion occurs when a US-based multinational corporation restructures itself so that the US parent is replaced by a foreign parent and the original US company becomes a subsidiary of the foreign parent. Increased use of corporate inversions led to a reform of US Treasury rules for this practice during the Obama administration and the termination of several large deals in pharmaceutical M&A in which the companies cited uncertainty over future policy changes regarding corporate inversion as one factor in ending the deals. Pfizer terminated two large deals: a proposed $160-billion merger with Allergan (headquartered in Dublin, Ireland) in 2016 and a $119-billion proposal to acquire AstraZeneca (headquartered in Cambridge, UK) in 2014. AbbVie also ended a proposed $55-billion acquisition of Shire (headquartered in Dublin, Ireland) in 2014.

So with a more equal footing in corporate taxation now in the US, a key question for 2018 is how will new, lower US corporate tax rates impact M&A.

2. Venture-capital financing remains robust. A key question for 2018 is whether private financing will continue to flow into the pharmaceutical industry. For overall venture-capital funding, 2017 was the second biggest year of investments ($71.9 billion) for venture-backed US startup firms, increasing 17% over 2016, according to a recent PwC and MoneyTree report. This healthy funding total was spread across relatively fewer deals, with 2017’s tally of 5,052 down 4% from 5,268 in 2016 and representing the lowest annual total since 2012. How investor activity will fare in 2018 is yet to be seen.

In looking at venture-capital funding into the US healthcare industry, which includes biotechnology-related companies and medical devices and equipment, dollars invested in the third quarter of 2017 (most recent data at time of publication) decreased by 4%, but the number of deals increased by 3%, with a resulting slight decrease in average deal value from $20.0 million in the third quarter 2016 to $18.6 million in the third quarter of 2017, according to a PwC and CB Insights' Healthcare MoneyTree report. Dollars invested in US healthcare increased slightly to $3.2 billion in the third quarter of 2017, which was 6% higher than the total funding in the prior quarter. Biotechnology-related industries remained on top of the healthcare sector in the US, holding a 70% share of third-quarter 2017 dollars invested while the medical devices and equipment-related industries accounted for 24% of the healthcare sector. Deal numbers were relatively constant with an increase of 2% from the prior quarter, with 171 deals closing in the third quarter of 2017. Total dollars raised from four megarounds was $789 million in the third quarter of 2017, making up 25% of total deal dollars, down five percentage points from 30% in the second quarter of 2017.

3. Corporate tax reform in the US. A policy issue with potential implications in the pharmaceutical industry is US corporate tax reform. Tax reform, the first major tax reform in the US since 1986, was signed into law in late December 2017 with a new corporate tax rate of 21%, down from the previous rate of 35%. At issue for the pharmaceutical industry is how a new corporate tax rate in the US may affect manufacturing investment in the US and M&A.

4. The new health economy. An overarching theme for 2017 and for 2018 is the move to what PwC termed in a recent analysis as the “new health economy," which describes a wave of challenges pharmaceutical and life-sciences companies are facing. These include consolidation among providers, especially hospitals, to produce efficiency gains; a more patient-centric focus whereby patients seek a greater role in their own care; increasing cost pressures from payers leading a move to pricing reform; and the declining role of the individual physician as rule-based, protocol-driven care rises. “The resulting healthcare system will focus increasingly on paying for the value rather than the volume of medical care; in other words, it will be a more consumer-facing industry,” according to the PwC analysis.

5. Innovation in the pharma industry. The US Food and Drug Administration (FDA) approved 46 new molecular entities (NMEs) in 2017, more than double the number approved in 2016 and a 21-year high. Following a downturn in 2016 when only 22 NME were approved, new drug approvals in 2017 outpaced a recent high of 45 NME approvals in 2015 and was the second highest total since 1996 when 53 NMEs were approved. The uptick in NME approvals in 2017 resumes an upward trajectory beginning in 2011 (with the exception of 2013) for NME approvals with 30 NMEs approved in 2011 and 39 in 2012. The exception was in 2013, which had a decline to 27 NMEs, but levels jumped again to 41 NMEs approved in 2014 and in 2015 when 45 NMEs were approved. So will innovation continue to be strong in 2018?

6. Generic-drug approvals on the rise. Under FDA Commissioner Scott Gottlieb, the agency has set as a high priority to improve the generic-drug review process as part of a means to increase drug competition. In 2017, the FDA recorded the highest annual total of generic drug approvals (1,027 generic drug approvals: 843 full approvals and 184 tentative approvals) in the agency’s history. According to a recent blog by Commissioner Gottlieb, if current trends continue, the agency said it expects to exceed this record number of generic drug approvals in 2018.

7. Transparency initiatives in drug pricing. The issue of drug pricing is always in the news, but it has taken on increased focus with several policy moves, chief among them legislative activity in the US for drug-pricing transparency. A recent PwC analysis says that following the trend that has accelerated in recent years, US states in 2018 will continue to address rising healthcare costs through pricing and transparency initiatives. A case in point occurred in October 2017 when California Governor Edmund G. Brown Jr. signed legislation, Senate Bill (SB) 17, Healthcare: Prescription Drug Costs, to increase transparency in prescription drug pricing by requiring pharmaceutical companies to give notice before raising prices. SB 17 requires drug manufacturers to provide a 60-day notice if prices are raised more than 16% in a two-year period. The bill applies to drugs that have a wholesale price of more than $40 for a 30-day supply. SB 17 also requires health plans and insurers to file annual reports outlining how drug costs impact healthcare premiums in California. On the federal level in the US, as part of the healthcare reform policy debates in 2017, the issue of drug pricing also emerged for policy consideration with legislative proposals calling for the federal government to negotiate lower prescription drug prices for Medicare and requiring drug manufacturers to publically release data and information justifying any significant price increase.

8. The pharma industry and Brexit. In 2017, in preparation for the UK’s withdrawal from the European Union (i.e., Brexit), the member states of the European Union (EU) selected Amsterdam, the Netherlands as the new headquarters for the European Medicines Agency (EMA), the EU’s pharmaceutical regulatory authority, now headquartered in London. The agency is now preparing for the move with the goal to take up its operations in Amsterdam by March 30, 2019. The EMA has been based in London since it was established in 1995. It currently employs nearly 900 staff members.

Nine associations representing the European and British pharmaceutical, biotechnology and over-the-counter medicines industries have stressed the importance of securing cooperation and a timely agreement between the UK and EU on medicines regulation as the parties negotiate trade policy post-Brexit. These associations include: the European Federation of Pharmaceutical Industries and Associations (EFPIA), which represents European innovator, research companies and national pharmaceutical associations in Europe; Medicines for Europe, which represents generic-drug manufacturers in Europe; EuropaBio, which represents European biotechnology companies; the European Confederation of Pharmaceutical Entrepreneurs (EUCOPE), which represents small-to-medium-sized innovator pharmaceutical companies in Europe; the Association of the European Self-Medication Industry (AESGP), which represents manufacturers of non-prescription or OTC medicines in Europe; the Association of the British Pharmaceutical Industry (ABPI), which represents pharmaceutical manufacturers in the UK; the British Generic Manufacturers Association (BGMA), which represents generic-drug companies and suppliers in the UK; the UK BioIndustry Association (BIA), which represents biotechnology companies in the UK; and Proprietary Association of Great Britain (PAGB), which represents OTC manufacturers in the UK.

Going forward in 2018, the key issue will be how the UK’s negotiations for an overall exit plan and subsequent trade policy will impact investment and product flows between the UK and EU, including for the pharmaceutical industry.

9. Technologies and products to address the opioid crisis. FDA Commissioner Scott Gottlieb has said that one of his highest priorities is to work on multiple fronts to reduce the scope of the opioid epidemic in the US. He said that the FDA has an important role to play in curbing new addiction, reframing the evaluation of the benefits and risks of opioids as part of the agency’s pre- and post-market efforts, and providing direction to prevent the serious adverse effects associated with these medications. Within the pharmaceutical industry, this has led to further development and application of abuse-deterrent technologies and non-opioid pain treatments. To date, the FDA has approved 10 opioid drugs with abuse-deterrent technologies, and the FDA is seeking to facilitate the development of generic drugs with these properties. In November 2017, the FDA issued final guidance to assist the industry in its development of generic versions of approved abuse-deterrent formulated opioids.

Companies are also developing non-opioid drugs in pain management. As an example, in June 2017, Pfizer and Eli Lilly and Company received FDA fast-track designation for the companies’ drug candidate, tanezumab, a non-opioid treatment of chronic pain in patients with osteoarthritis and chronic low back pain. Tanezumab is an investigational humanized monoclonal antibody that selectively targets, binds to and inhibits nerve growth factor (NGF). NGF levels increase in the body as a result of injury, inflammation or in chronic pain states. By inhibiting NGF, tanezumab may help to keep pain signals produced by muscles, skin, and organs from reaching the spinal cord and brain. Tanezumab has a mechanism that acts in a different manner than opioids and other analgesics, including nonsteroidal anti-inflammatory drugs. In 2013, Pfizer and Lilly entered into a worldwide co-development and co-commercialization agreement for the advancement of tanezumab.

So the question for 2018 is will the industry see further product innovation and related technologies to address the opioid issue?

10. Real-world data in drug development. Cited by a PwC analysis as a key issue for 2018 is the challenge presented to pharmaceutical and life-science companies of their ability to collect and use real-world data for which patient health and outcomes data are gathered outside of randomized controlled trials. The PwC analysis points out that the FDA routinely accepts real-world data for postmarket commitments, such as safety monitoring, but had not used such an approach for new drug approvals or label revisions. The 21st Century Cures Act of 2016, which requires the FDA to consider additional uses of evidence drawn from real-world data for drugs and devices, changed that, and a framework for applying the law to drug companies is expected by the end of 2018, with guidance to follow in 2021. These include replacing clinical trials with “real-world evidence” to support new indications. The PwC analysis says that the industry may see new opportunities to use such data for faster, less costly FDA approvals and freer communication with payer formularies.